On 12 May, I attended the High-Level Stakeholders Roundtable on the EU ETS Review in Brussels, a session convened by the European Commission to gather stakeholders’ views on the review of the ETS, the European CO₂ emissions trading system. Around sixty participants were present, representing a wide range of sectors: ports, airlines, energy-intensive industries, renewables, banks, waste-to-energy plants, the circular economy, as well as NGOs and think tanks. A true cross-section of those who have something to say – and to ask – about the most significant reform of European climate policy over the next fifteen years.

I was representing EUASE, one of the organisations active in energy efficiency. The energy efficiency sector (€150 billion in annual turnover, 1.2 million jobs) is spread across Europe, largely made up of SMEs, and particularly strong in Italy: boilers, heat pumps, motors, building automation, and industrial heat recovery. Like all ‘green’ sectors (renewables, storage, electric mobility, cleantech in general), it depends on three things: clear and ambitious European legislation, consistent national transposition without too many additional rules and regulations (so-called ‘gold-plating’), and, albeit to a lesser extent, a stable framework of incentives. Without stable regulations, it is impossible to plan investments five or ten years ahead; there is no doubt that the rollercoaster ride the Green Deal is currently undergoing represents a factor of uncertainty that does not facilitate decisions on expansion and growth.

The ETS is the mechanism through which, since 2005, Europe has set a price on CO₂ emissions from large industries, the electricity sector, aviation and, from 2024, maritime transport. Companies must purchase allowances for every tonne they emit. Some allowances, however, are granted free of charge, particularly to energy-intensive industries such as steel, cement, chemicals and aluminium, in an attempt to protect them from non-European competition. The Commission’s review of the ETS’s first twenty years is significant. Emissions from the sectors covered have fallen by around 50% compared to 2005, and we are on track to meet the 62% reduction target by 2030. The system has generated over €250 billion in revenue to date, of which nearly €39 billion in 2024 alone, earmarked by law to fund the energy and climate transition in Member States. That is no small feat. But the average figure masks a highly uneven distribution: the system has worked well in the electricity sector, where it has helped to close coal-fired power stations and kick-start renewables. It has worked far less well in heavy industry, where the substantial free allowances drastically reduced the incentive to change, particularly throughout the system’s initial phase.

That system now needs to be revised to bring it into line with the target of reducing European emissions by 90% by 2040. There is no doubt that this reform is being launched at the most politically delicate moment of the last twenty years, with the EU struggling to balance climate ambition, industrial competitiveness and energy security; and with political forces in Parliament and governments in the Council pushing to weaken, not strengthen, the system. But the dichotomy between climate ambition and industrial competitiveness, which many insist on creating, is false. The crisis in Iran and the pressure on gas and oil prices in recent months demonstrate that as long as Europe remains dependent on fossil fuels, every geopolitical shock is passed on to households and businesses. An ambitious reform of the ETS moves precisely in the direction of making that dependence progressively less viable, and thus of strengthening, not weakening, our competitiveness.

What reform of the ETS is the Commission preparing?

The Commission is working on four parts of the ETS reform. On 1 April, it proposed reforming the Market Stability Reserve, the mechanism that regulates the number of allowances in circulation to prevent price crashes or surges. On 11 May, it presented a proposal to update the benchmarks, i.e. the parameters that determine how many free allowances each industry receives. Benchmarks are calculated based on the emissions intensity of the top 10% of the most efficient installations for each product (steel, cement, glass, etc.) and, in theory, should become stricter year on year as industry progresses with its decarbonisation. The 11 May proposal is now open for public consultation and is expected to be adopted definitively by the end of June. I would like to highlight a significant detail here: in the proposal to update the benchmarks, the Commission explained that it had used ‘all available legal flexibilities’ to relax the parameters, with an estimated additional value of around €4 billion in free allowances for energy-intensive industries over the period 2026–2030. This is a puzzling first sign, as it runs counter to what the Commission itself has identified as necessary: linking access to benefits to concrete decarbonisation measures. Finally, a proposal for a comprehensive revision of the ETS Directive is expected on 15 July.

And in parallel, the Industrial Decarbonisation Bank (IDB) is taking shape, the new European financial instrument designed to support industrial decarbonisation: €100 billion in potential volume, of which the first €30 billion has already been earmarked for the so-called Investment Booster.

I found three figures particularly interesting. The first: since 2005, over 20 billion free allowances have been distributed, mainly to energy-intensive industries. Between 2021 and 2025, free allowances covered on average around 85% of the emissions these industries actually produced; in other words, they paid for only the remaining 15% out of their own pockets. The consequence? To quote the Commission directly: ‘this has not led to the expected investments in decarbonisation’. The second: the 17% reduction in industrial emissions achieved between 2015 and 2023 was achieved ‘mainly through energy efficiency’. It is a pity, however, that energy efficiency does not feature among the explicit priorities of the IDB.

The third point: 78% of the ETS revenue generated so far has gone to national budgets, and only 5% is actually channelled back to European industry. ‘There is still not enough transparency on where and how Member States spend the money’.

This is a particularly relevant point for Italy, where ETS revenues amount to around 3–4 billion euros a year and the share actually allocated to energy efficiency, energy poverty and industrial decarbonisation remains marginal: indeed, the reduction in excise duties recently extended by the government was financed with 300 million euros from the ETS fund – in other words, fossil fuel consumption, which the ETS is supposed to discourage, is actually being subsidised.

It came as no surprise that the point on which virtually all participants agreed was rightly to ensure that Member States use ETS revenues to finance the transition and not to bolster their budgets.

A second point that came up repeatedly in the discussion was the issue of conditionalities and free allowances. Naturally, all representatives of energy-intensive industries complained that they could not operate without an extension of the period for free allowances, whilst the rest of the participants were largely in favour of maintaining the commitment to phase them out and extending the sectors covered by the ETS.

Thirdly, some concern emerged regarding the criteria (or rather the lack thereof) for accessing the Industrial Decarbonisation Bank. The Commission explained that the first phase, worth €30 billion, will be managed on a “first-in, first-served” basis, with a light eligibility check, no qualitative selection criteria, and “competition based on speed rather than price”. In other words: €30 billion of public funds distributed on a first-come, first-served basis. Designed in this way, access to the Bank will not be easy for SMEs, which often lack the internal structures to submit projects quickly, nor for widespread energy efficiency measures which, by their very nature, are not single mega-projects but thousands of smaller, replicable initiatives. The funds thus risk ending up with a few large projects, or with technologies that are still immature on an industrial scale: carbon capture and storage (CCS), green hydrogen, blue hydrogen, Direct Air Capture. Technologies that currently have very few operational plants in Europe, high costs, long lead times, and a growing list of cancelled projects, but powerful and wealthy backers, often linked to traditional operators, mostly in the fossil fuel sector. The most striking case is that of green hydrogen: in 2024–2025, a long series of major European projects announced in the preceding months by Shell, BP, ArcelorMittal and other large groups were postponed, scaled back or cancelled, because the companies did not find it economically viable enough to make the leap from the demonstration phase to industrial scale.

The Commission will therefore present its proposal in July. Given the balance of power in the Parliament and the Council, the negotiations risk resulting in a text that is much weaker than the initial proposal. For this reason, it is advisable for the Commission not to start off with the brakes on, in the hope of softening resistance and opposition. The ETS must emerge from the Berlaymont building robust, consistent with the 2040 target and capable of withstanding months of negotiation without being watered down. If the reform is weak and uncertain, Europe could lose, for the next fifteen years, the main tool it has given itself to decarbonise its industry.